VZCZCXRO2217
RR RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #0039/01 0070758
ZNR UUUUU ZZH
R 070758Z JAN 10
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8577
INFO RUEHFK/AMCONSUL FUKUOKA 8202
RUEHNAG/AMCONSUL NAGOYA 5309
RUEHNH/AMCONSUL NAHA 0546
RUEHOK/AMCONSUL OSAKA KOBE 2015
RUEHKSO/AMCONSUL SAPPORO 8701
RUEATRS/TREASURY DEPT WASHDC
RHEHAAA/NSC WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 04 TOKYO 000039 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR DOHNER, WINSHIP, AND FOSTER 
STATE FOR E, EEB AND EAP/J 
NSC FOR DANNY RUSSELL AND JIM LOI 
STATE PASS TO USTR FOR AUSTR CUTLER, BEEMAN, LEE AND 
HOLLOWAY 
 
E.O. 12958: N/A 
TAGS: ECON EFIN JA
SUBJECT: HATOYAMA CABINET APPROVES FY2010 BUDGET 
 
REF: A. TOKYO 00018 
     ¶B. TOKYO 00025 
     ¶C. 2009 TOKYO 02819 
     ¶D. 2009 TOKYO 02464 
 
¶1. (SBU) Summary: The Hatoyama Cabinet approved the central 
government's initial budget for FY2010 (April 2010 - March 
2011) on December 25, clearing the way for its submission to 
the Diet.  This is the first full budget formulated by the 
Hatoyama Administration since it came to power in September 
¶2009.  The initial FY2010 general account budget of JPY92.3 
trillion (US$1.0 trillion) represents a 4 percent increase 
over the initial FY2009 budget, but is still 10 percent 
smaller (about JPY10 trillion (US$109 billion) or 2.2 percent 
of GDP) than the revised FY2009 budget, inclusive of the two 
FY2009 supplemental budgets. 
 
¶2. (SBU) FY2010 tax revenues are projected to remain weak, 
rising only 1.5 percent from FY2009.  Consequently, the 
budget assumes that Japanese government bond (JGB) issuances 
will exceed tax revenues for the second straight year.  The 
budget contains JPY3.1 trillion (US$34 billion) in policy 
measures promised in the DPJ's "manifesto" (policy platform) 
issued in the run up to the August 2009 Lower House election. 
 The budget bills will be submitted to the Diet in January. 
Final Diet approval is likely in late March.  End Summary. 
 
Competing Budgetary Priorities 
------------------------------ 
 
¶3. (SBU) In compiling the FY2010 budget, the Hatoyama Cabinet 
sought to navigate between two competing policy priorities: 
demonstrating the DPJ's fiscal discipline while avoiding 
premature withdrawal of fiscal stimulus.  The combined FY2010 
general account and FILP (Fiscal Investment and Loan Program) 
outlays are equivalent to 23 percent of GDP in FY2010.  While 
this represents a contraction of 3.4 percentage points (pp) 
from FY2009, total outlays are still a full 2.1 pp higher 
than the average of the previous ten years (FY2000-2009). 
The government also appears to be counting on the assumption 
that most of the JPY7.2 trillion (US$ 78 billion) in new 
spending included in the second FY2009 supplemental budget 
will only actually impact the economy in FY2010. 
 
General Account Expenditures 
---------------------------- 
 
¶4. (SBU) FY2010 general account expenditures for FY2010 total 
JPY92.3 trillion (US$1 trillion), a 4 percent increase over 
the initial FY2009 budget.  This partly reflects a 6 percent 
increase in revenue sharing with local governments due to 
their worsening fiscal condition.  Debt service costs are 
also projected to increase 2 percent, under the assumption 
that the ten-year JGB yield averages 2.0 percent in FY2010. 
Social security spending is set to increase 10 percent and 
accounts for over half (51 percent) of total discretionary 
ministerial budget spending.  This increase is largely due to 
the introduction of a child allowance program paying 
JPY13,000 (US$141) per month for each child until graduation 
from middle school, a key DPJ electoral pledge.  In contrast, 
public works spending is set to decline a record 18 percent 
to JPY5.8 trillion (US$63 billion), consistent with the 
Hatoyama Cabinet's intent to shift fiscal resources "from 
(construction) concrete to households."  Spending on official 
development assistance (ODA) has been cut 8 percent from the 
initial FY2009 budget to JPY619 billion (US$6.7 billion), the 
eleventh consecutive annual decrease on an 
initial-over-initial budget basis.  Like last year, the 
FY2010 general account budget contains JPY1.35 trillion 
(US$14.6 billion) in reserves, including JPY1.0 trillion 
(US$10.9 billion) to cope with economic shocks.  In addition, 
the FY2010 budget will repay JPY0.7 trillion (US$7.6 billion) 
borrowed in FY2008 from the debt consolidation special 
account (a sinking fund) to cover smaller-than-estimated tax 
revenues. 
 
¶5. (SBU) (Note: The general account budget consists of two 
mandatory spending items -- debt service costs and revenue 
 
TOKYO 00000039  002 OF 004 
 
 
sharing with local governments -- as well as discretionary 
ministerial budget spending such as social security and 
public works.  End note.) 
 
¶6. (U) 
 
FY2010 General Account Budget Expenditures 
------------------------------------------ 
 
                            JPY       percent change 
                            trillion  from initial 
                                      FY2009 
                            ------------------------ 
TOTAL                         92.3        4.2 
Debt Service Costs            20.6        2.0 
Revenue Sharing with 
 Local governments            17.5        5.5 
Ministerial Budget Spending   53.5        3.3 
  Social Security             27.3        9.8 
  Education and Science        5.6        5.2 
  Military Pensions            0.7       -9.3 
  National Defense             4.8        0.3 
  Public Works                 5.8      -18.3 
  Economic Cooperation         0.6       -7.5 
  Small Businesses             0.2        1.1 
  Reserves                     1.4        0.0 
  Other                        7.2        6.1 
 Repayment to FY2008           0.7        n/a 
  Settlement Fund 
 
(Note:  ODA includes spending budgeted under Economic 
Cooperation, as well as under other budget categories.  End 
note.) 
 
¶7. (U) 
 
FY2010 General Account Budget 
----------------------------- 
 
                                     Change from 
                           Initial  Initial  Revised 
                           FY2010   FY2009   FY2009 
                           ------------------------- 
                          (trillion)   (percent) 
TOTAL EXPENDITURES           92.3     4.2     -10.0 
  Ministerial Budgets        53.5     3.3     -19.9 
    Social Security          27.3     9.8      -5.3 
    Public Works              5.8   -18.3       n/a 
    Other Discretionary      20.4     3.0       n/a 
  Debt Service               20.6     2.0       7.3 
  Revenue Sharing with 
   Local Governments         17.5     5.5       5.5 
  Repayment to FY2008 
   Settlement Fund            0.7     n/a       n/a 
TOTAL RECEIPTS               92.3     4.2     -10.0 
  Tax Revenues               37.4   -18.9       1.5 
  Other receipts             10.6    15.8     -13.4 
  Government Bond Issuance   44.3    33.1     -17.1 
 
¶8. (U) 
 
FY2009 General Account Budget 
----------------------------- 
 
                            Initial    FY2009 with 
                            FY2009     Supplementals 
                            ------------------------ 
                                 (trillion) 
TOTAL EXPENDITURES           88.5          102.6 
  Ministerial Budgets        51.7           66.7 
    Social Security          24.8           28.8 
    Public Works              7.1            n/a 
    Other Discretionary      19.8            n/a 
  Debt Service               20.2           19.3 
  Revenue Sharing with 
   Local Governments         16.6           16.6 
  Repayment to FY2008 
   Settlement Fund            0.0            0.0 
 
TOKYO 00000039  003 OF 004 
 
 
TOTAL RECEIPTS               88.5          102.6 
  Tax Revenues               46.1           36.9 
  Other receipts              9.2           12.2 
  Government Bond Issuance   33.3           53.5 
 
Measures Contained in the DPJ Manifesto 
--------------------------------------- 
 
¶9. (SBU) The FY2010 general account budget contains a total 
of JPY3.1 trillion (US$33.7 billion) in policy measures 
promised by the DPJ ahead of last August's Lower House 
election.  This is roughly JPY3.8 trillion (US$41.3 billion) 
smaller than the budget requests made in October by 
individual ministries to conform to the DPJ's manifesto.  The 
decrease is largely a result of the Hatoyama Cabinet's 
decision not to eliminate the surcharge rates on four 
road-related taxes from April 2010 (Ref A).  Instead, the 
surcharge rates on three road-related taxes (gasoline tax, 
diesel oil delivery tax, and automobile acquisition tax) will 
be replaced by new "special" rates that result in no change 
in the tax burden.  The remaining fourth surcharge rate on 
the automobile tonnage tax will be halved from JPY3,800 to 
JPY1,900 (US$41 to US$21) per half ton from April 2010. 
 
¶10. (U) The FY2010 budget does include: 
 
-- A new monthly child-rearing allowance of JPY13,000 
(US$141) in FY2010 to each child until graduation from middle 
school, with no household income ceiling. 
 
-- The elimination of designated highway tolls. 
 
-- A JPY0.6 trillion (US$6.5 billion) income support subsidy 
program for rice farmers designed to make up the difference 
between the cost of production and sales price. 
 
-- Making public high school effectively free, as well as 
providing JPY120,000 to JPY240,000 (US$1,304 to US$2,609) per 
year for each private high school student, depending on 
household income levels. 
 
¶11. (U) 
 
Measures Promised in DPJ's Manifesto 
------------------------------------ 
 
                                            Actually 
                               Requested    Budgeted 
                               --------------------- 
                                    (trillion) 
TOTAL                             6.9         3.1 
Spending Measures                 4.4         2.9 
  New Monthly Child Allowance     2.3         1.7 
  Highway Tolls Elimination       0.6         0.1 
  Rice Farmers Income Support     0.6         0.6 
  Free High School                0.5         0.4 
  Employment Measures             0.3         0.02 
  Pension Records Problems        0.1         0.1 
Tax Measures                      2.5         0.2 
  Road-related Tax Surcharges 
   Elimination                    2.5         0.2 
 
(Note: Local governments will shoulder some costs for the 
child allowance program.  End note.) 
 
General Account Receipts 
------------------------ 
 
¶12. (SBU) MOF projects FY2010 tax revenues at JPY37.4 
trillion (US$407 billion), a 1.5 percent increase from 
FY2009.  Given this weak tax revenue growth, MOF plans to 
issue JPY44.3 trillion (US$482 billion) of new JGBs in 
FY2010, barely meeting the Hatoyama Cabinet's policy target 
of limiting JGB issuance in the initial budget to "about 
JPY44 trillion (US$478 billion)" (equivalent to the FY2009 
initial budget plus the first FY2009 supplemental budget). 
As a result, the total amount of JGBs issued in FY2010 is 
projected to exceed tax revenues for the second year in a 
 
TOKYO 00000039  004 OF 004 
 
 
row.  As for non-tax receipts, MOF will transfer to the 
general account budget JPY4.8 trillion (US$52 billion) in 
retained earnings from the Fiscal Loan Fund Special Account 
and, consistent with past years, JPY2.9 trillion (US$32 
billion) in retained earnings from the Foreign Exchange 
Special Account. 
 
Overview of FILP 
---------------- 
 
¶13. (U) The FY2010 FILP (the so-called "second budget") calls 
for total outlays of JPY18.4 trillion (US$200 billion), up 16 
percent from the initial FY2009 level, but down 22 percent 
from the final FY2009 level inclusive of the two FY2009 
supplemental budgets.  FILP lending to government-affiliated 
financial institutions and public works related agencies will 
decline 33 percent and 42 percent from their final FY2009 
levels, respectively.  Allocations to local governments will 
increase 10 percent.  FILP financing is mainly provided 
through FILP bonds (JPY13.5 trillion or US$147 billion) and 
government-guaranteed bonds (JPY4.8 trillion or US$52 
billion). 
 
¶14. (U) 
 
FY2010 Fiscal Investment and Loan Program 
----------------------------------------- 
 
                                     Change from 
                           Initial  Initial  Revised 
                           FY2010   FY2009   FY2009 
                           ------------------------- 
                           (trillion)  (percent) 
TOTAL OUTLAYS                18.4    15.7     -22.2 
  Government affiliated 
   financial institutions    10.5    26.3     -33.2 
  Public works agencies       0.6   -30.8     -42.5 
  Local governments           4.3    10.3      10.3 
  Other                       3.0     5.7      -0.4 
TOTAL FUNDING                18.4    15.7     -22.2 
  FILP bonds                 13.5    12.6     -25.4 
  Government-guaranteed bonds 4.8    26.5      -6.6 
  Other                       0.1   -14.4     -74.5 
 
¶15. (U) 
 
FY2009 Fiscal Investment and Loan Program 
----------------------------------------- 
 
                            Initial    FY2009 with 
                            FY2009     Supplementals 
                            ------------------------ 
                                  (trillion) 
TOTAL OUTLAYS                  15.9         23.6 
  Government affiliated 
   financial institutions       8.3         15.7 
  Public works agencies         0.8          1.0 
  Local governments             3.9          3.9 
  Other                         2.8          3.0 
TOTAL FUNDING                  15.9         23.6 
  FILP bonds                   12.0         18.1 
  Government-guaranteed bonds   3.8          5.1 
  Other                         0.1          0.4 
 
ROOS